A Perfect Storm for Michigan’s Renewable Portfolio Standard?

In his June 7, 2013 opinion in Illinois Commerce Commission v. FERC,[1] Judge Richard Posner of the U.S. Court of Appeals for the Seventh Circuit inserted two lines of dicta on the constitutionality of Michigan’s Renewable Portfolio Standard, or Public Act 295 (PA 295).[2] By discriminating in favor of in-state renewable energy, he opined that Michigan’s law “trips over an insurmountable constitutional objection. Michigan cannot, without violating the Commerce Clause of Article 1 of the Constitution, discriminate against out-of-state renewable energy.”[3] The opinion will have little precedential value—it was not necessary for the holding, not fully briefed by the parties, and not binding on the Sixth Circuit. Nonetheless, the statement sent a ripple through the energy community, casting doubt upon Michigan’s law and the many similar Renewable Portfolio Standards with preferences for homegrown renewables. Twelve of these laws have already faced lawsuits alleging out-of-state discrimination,[4] and Judge Posner’s statement may be a harbinger of things to come in Michigan.

Two years later and several hundred miles away in the state capitol, Michigan legislators began launching their own attack on PA 295. After the RPS targets are met this year, there is no legal mandate for utilities to further increase their share of renewable generation. Republican legislators have introduced a bill that would repeal the renewable portfolio standard altogether.[5] Meanwhile, the Democratic proposal would increase the RPS to 20 percent by 2022.[6]

These efforts to rewrite Michigan’s comprehensive energy policy could spell trouble for the future of the Renewable Portfolio Standard. Yet with complete repeal unlikely, perhaps clean energy advocates should welcome the bills rattling around in Lansing. This legislative debate provides the perfect opportunity to rewrite PA 295 to fend off the constitutional challenge foretold in Judge Posner’s opinion.

Dormant Commerce Clause: The Legal Standard

The Commerce Clause of the U.S. Constitution grants Congress the power “[t]o regulate Commerce . . . among the several states.”[7] While the Clause contains no explicit language to this effect, courts have long recognized a negative implication of this enumerated power, known as the “dormant Commerce Clause,” which prohibits states from discriminating against or unduly burdening interstate commerce.[8]

Dormant Commerce Clause jurisprudence distinguishes between state laws that openly discriminate and those that impose a burden upon interstate commerce. The first category—laws that discriminate facially, purposefully, or in practical effect against out-of-state economic interests—are virtually per se invalid.[9] To uphold a discriminatory law, a court must find that the law is justified by a legitimate state interest unrelated to economic protectionism and that no less discriminatory alternative is available.[10]

The second category, facially neutral statutes, is subject to a lower level of scrutiny under the Pike v. Bruce Church, Inc. balancing test and will be upheld if the law’s putative local benefit outweighs its burden on interstate commerce.[11] In practice, the test is very forgiving to states. Unless the purported state interest appears to be illusory, courts rarely strike down state laws under the Pike test.[12]

Michigan’s Clean, Renewable, and Efficient Energy Act of 2008

Michigan’s Renewable Energy Standard is part of the 2008 Clean, Renewable, and Efficient Energy Act, or PA 295, signed into law on October 6, 2008 by then-Governor Jennifer Granholm.[13] The RPS requires Michigan electricity providers to supply at least 10 percent of their Michigan retail sales from renewable energy by 2015, with interim targets in 2012, 2013, and 2014.[14] The standard is applicable to Michigan’s investor-owned utilities, electric cooperatives, municipal electric utilities, and alternative electric supplier (AESs).[15]

Under PA 295, electric providers demonstrate compliance through the purchase and/or production of Renewable Energy Credits (RECs).[16] One REC is created for each megawatt-hour of renewable energy generation from qualified technologies, including wind, solar and solar thermal, biomass, hydroelectric, geothermal, municipal solid waste, and landfill gas.[17]

Michigan’s law contains two provisions that raise dormant Commerce Clause questions. First, eligible renewable energy systems must be located either within Michigan or within the service territory of a utility serving customers in Michigan (the “geographic sourcing restriction”).[18] Second, PA 295 grants a 1.1 REC multiplier each megawatt-hour generated from a renewable energy system built using equipment made in Michigan or constructed by a Michigan workforce (the “Michigan incentive multiplier”).[19] These two geographic restrictions lie at the heart of a potential constitutional challenge.

Michigan Incentive Multiplier Trips at Strict Scrutiny

The Michigan incentive multiplier holds little promise of withstanding judicial review under the dormant Commerce Clause. This location-based preference facially discriminates against non-Michigan entities by granting bonus RECs to renewable energy facilities constructed using Michigan equipment or labor. Comparable incentives are not provided to renewable energy producers who do not use Michigan sourced materials and labor. The effect of the multiplier, then, is to limit competition and shift business to in-state entities, thereby impeding the flow of interstate commerce. While a law that evenhandedly promotes investment in renewable power is constitutionally permissible, a preference for in-state industry is not.

Facial discrimination should be enough to strike down the Michigan Inventive Multiplier on Commerce Clause grounds. On top of that, however, contemporaneous evidence provides indications of a protectionist motive. The declared purposes of PA 295 were to promote a diversified fuel mix, promote greater energy security through the use of local resources, improve air quality, and toencourage private investment in renewable energy.[20] Of these, the only goal meaningfully served by the Michigan incentive multiplier is in-state economic development. Indeed, the Michigan Public Service Commission noted in its 2014 report on the implementation of PA 295 that the “Michigan inventive REC provision is meeting its intended purpose to encourage developers to maximize utilization of Michigan equipment and labor.” Governor Granholm was also forthright that a primary goal of PA 295 was to aid Michigan’s manufacturing industry. In an early press event on the bill, she noted: “the package will do a lot of things, but for me the most important thing is the job creation and adding a whole new sector” for Michigan’s economy.[21]The dormant Commerce Clause does not prohibit states from promoting local economic development and job growth. As one commentator noted, “[n]o renewable energy mandate passed a state legislature without the promise of thousands of new jobs.”[22] However, while a law that evenhandedly promotes investment in renewable power is constitutionally permissible, one intended to preference in-state industry interests by encouraging increased consumption of local goods or services is not.[23]

Murkier Waters for the Geographic Sourcing Restriction

The constitutionality of Michigan’s geographic sourcing restriction is less certain. Public Act 295 would be easily struck down if the law banned utilities from purchasing out-of-state renewable power altogether. However, the limit on eligible renewable power does not fall into this trap. The RPS permits utilities to satisfy the 10 percent mandate with electricity generated from a renewable energy system (1) located in Michigan or (2) within the nearby service territory of a utility that also serves Michigan, which would include parts of Indiana, Ohio, Minnesota, and Wisconsin.[24] By its plain terms, therefore, the Act does not discriminate based on the territorial boundary of the state.

The Supreme Court has made clear, however, that a state law “need [not] be drafted explicitly along state lines in order to demonstrate its discriminatory design.”[25] Here, Michigan has closed its doors to power from forty-five states and most of Indiana, Ohio, Minnesota, and Wisconsin based purely on location. By limiting eligibility in this way, the state has attempted to “dr[aw] a line around itself and treat[] those inside the line more favorably than those outside the line.”[26] While a few out-of-state generators were swept under Michigan’s protective reach, the vast majority of entities were categorically excluded based on their geographic location outside the Michigan distribution network. This type of geographic Balkanization would likely amount to facial discrimination.

Even assuming that the geographic sourcing restriction is facially neutral, the law undoubtedly has the practical effect of discriminating against out-of-state renewable power producers.[27] Again, PA 295 requires RPS-eligible power to be generated within the Michigan service territory. By severely limiting a supplier’s compliance options, the RPS ensures that the renewable power used to satisfy the RPS is generally produced in-state, or at least in close proximity to the state.

The delineation between a “discriminatory effect” sufficient to trigger heightened scrutiny and an “incidental burden” to which the Pike balancing would be applied is imprecise.[28]However, evidence suggests that the Michigan RPS more than “incidentally” burdens the interstate trade in renewable power. A 2015 report from the Michigan Public Service Commission indicates that “[n]inety-three percent of the energy credits used for 2013 compliance were from renewable energy generated in Michigan.”[29] Only seven percent came from renewable energy generated in Indiana, Iowa, Minnesota, and Wisconsin.[30] Furthermore, without the in-state mandate, renewable electricity produced in nearby states could be purchased far below current prices. The most recent contracts for new wind capacity in Michigan have levelized costs in the $50 to $55 per MWh range, according to a 2015 report from the Michigan PSC.[31] This exceeds the cost of other regional wind projects costs by over 30% and the nationwide average by roughly 50%.[32]

While this data does not demonstrate causation—that the RPS led to an appreciably greater use of in-state power and fewer imports than would otherwise have occurred—the data provides powerful evidence that PA 295 established a discriminatory barrier to the interstate sale and transmission of renewable energy into Michigan.

Applying Strict Scrutiny

The practical effect of a finding that PA 295 discriminates against interstate commerce is fatal. In order to uphold the law, a court must find that the law serves a legitimate state interest unrelated to economic protectionism, and that no less discriminatory means to advance its legitimate local interest.[33] The geographic sourcing restriction may be justified by legitimate public health, safety, or environmental goals that go beyond economic motivation. For example, local renewable power generation can displace electricity generated from coal and natural gas plants, thereby reducing conventional air pollutants, such as sulfur dioxide (SO2), nitrous oxides (NOx), and particulate matter, and improving local air quality and public health.[34]

However, Michigan would ultimately have difficulty mounting any defense that it lacks a non-discriminatory means to achieve these permissible state goals. The geographic sourcing restriction is a blunt method of mitigating line-losses or achieving in-state emissions reductions. Furthermore, many of these goals would arguably be better served by technology-forcing regulations for in-state power plants,[35] subsidies for in-state renewables generators, demand response or energy efficiency regulations, or purchase quotas not relying on homegrown renewable power. This point is only underscored by the decision of most states to enact similar RPSs without relying on in-state preferences. Therefore, if the geographic sourcing restriction were deemed discriminatory, it would almost certainly fail under the rigorous strict scrutiny test.

Pike Test – Finding a Legitimate Local Purpose

If the Michigan RPS is lucky enough to survive strict scrutiny, the next stop is the Pike balancing test. At this stage the court would determine whether the burdens imposed on interstate commerce by Public Act 295 are excessive in relation to a legitimate public interests served.[36]

The burden Michigan’s RPS imposes on the interstate renewable power market is certainly not insubstantial.The practical impact of Michigan’s RPS has been to preclude energy suppliers in 45 states from competing for a share of Michigan’s renewable energy demand. On the other hand, the state has not banned the import of renewable energy for purposes other than meeting the 10 percent mandate. Electricity may continue to move freely across the Michigan border through the MISO or PJM markets. Additionally, it is unclear to what extent leveling the playing field in Michigan would lead to a greater influx of out-of-state power.

At a more general level, Michigan’s law may be seen as an impediment to the goals embodied in FERC Order 888, namely unimpeded and efficient competition in the wholesale power marketplace.[37] As the share of renewable power generation increases nationwide, protectionist Renewable Portfolio Standards threaten to splinter national energy markets. Therefore, even if Michigan’s law has only an incidental burden on the regional trade in renewable energy, a court may reasonably conclude that a patchwork of preferential renewable energy laws across the nation places an unwelcome burden on interstate electricity markets.

However, Michigan should have no trouble establishing sufficient evidence of one or more of the legitimate state interests that outweigh any burden on interstate commerce. Michigan has asserted several local interests in the text of the law. PA 295 expressly aims to:

promote the development of clean energy, renewable energy, and energy optimization through the implementation of a clean, renewable, and energy efficient standard that will cost-effectively do all of the following[:]

(a) Diversify the resources used to reliably meet the energy needs of consumers in this state.

(b) Provide greater energy security through the use of indigenous energy resources available within the state.

(d) Provide improved air quality and other benefits to energy consumers and citizens of this state.[38]

The economic development goal expressed in subsection (c) would not suffice as a legitimate state interest, and advertising this purpose on the face of the statute may compromise the state’s ability to justify its protectionist design on other grounds.

However, as suggested by subsections (a) and (b), renewable power does have the distinct advantage of helping insulate consumers and the state economy from electricity or fuel price spikes. Michigan consumers rely on coal and nuclear power for more than 80% of their electricity.[39] The entirety of Michigan’s coal is imported, mostly by rail from Wyoming and Montana, and to a tune of $1.2 billion dollars annually.[40] Michigan’s dependence on coal generation has been declining due to falling natural gas prices and pressure from environmental regulations, but the state also imports 75% of its natural gas needs.[41] This overreliance on imported fuels exposes the state to volatile or increasing fossil fuel prices. Furthermore, pending environmental regulations such as EPA’s Clean Power Plan and Mercury Air Toxics Rule, as well as nuclear waste disposal costs, mean that a large part of the state’s portfolio is subject to considerable regulatory risk. Renewable energy can serve as a financial hedge, reducing the state’s exposure to these risks.

Michigan’s geographic sourcing restriction may also be warranted to achieve local emissions reductions from fossil-fuel power plants, as advanced in subsection (d). The climate change impact of renewable energy accrues globally regardless of where emissions are displaced.Therefore, a state cannot justify in-state preferences on the “local” climate benefits of greenhouse gas emissions reductions. Nonetheless, renewable power generation displaces electricity generated from coal and natural gas plants, thereby reducing conventional air pollutants—sulfur dioxide (SO2), nitrous oxides (NOx), particulate matter, mercury, and lead—and improving local air quality and public health.[42] The actual effect on air quality depends on how renewable resources are added the supply mix. Constructing a solar energy project in Michigan has a chance of displacing polluting coal plants in Michigan. Buying RECS from an Arizona solar project probably does not. Under the more forgiving Pike Balancing test, however, Michigan would have little trouble establishing a rational connection between its purposes of air quality improvement and the geographic sourcing restriction, despite evidence that in-state location is an imperfect proxy for fossil fuel emission displacement.

While PA 295 does not expressly assert any state interest related to transmission losses and infrastructural costs, this is arguably one of the greatest state interests in the eligibility restriction based on the location of the power within the state’s distribution grid. First, requiring utilities to purchase renewable power from within the state avoids some electricity transmission and distribution losses, increasing the efficiency of Michigan’s generation mix. Transmission lines waste somewhere around 6% of the power they deliver.[43] Under both PJM and MISO’s Locational Marginal Price (LMP) schemes, customers in Michigan end up paying for the cost of these marginal losses.[44] PA 295 theoretically helps minimize the distance power travels to reach its load and thus the costs of delivering renewable electricity to Michigan consumers. Second, ramping up renewable power generation often entails costly transmission investments to move power from areas where renewable power is most abundant to load centers where it will be used. Notably, however, the court in ICC v. FERC itself rejected Michigan’s argument that it should pay a lower share of MISO transmission line investments because it draws little renewable power from outside the state.[45]

Conclusion

Michigan’s geographic sourcing restriction and Michigan incentive multiplierleave the state’s RPS vulnerable to a dormant Commerce Clause challenge. Of course, it is possible that PA 295 may never be contested in court, given the law’s carve-outs for certain existing projects and special interests that would have been most likely to sue. Here, an ounce of prevention was certainly worth a pound of cure. Article III limitations such as standing may also bar a challenge on the merits, as they did in a lawsuit against renewable standards in Connecticut.[46] Nevertheless, until the preferential language in Michigan’s RPS is removed, the law will remain in jeopardy.

For this reason, policymakers in Lansing should take heed. As Public Act 295 is retooled for a new chapter in Michigan’s energy policy, they have an opportunity to shield the state’s Renewable Portfolio Standard from constitutional challenge. Rather than a Michigan incentive multiplier, the state should provide production incentives for in-state renewable energy generators.[47] Rather than a geographic sourcing restriction, the state should condition RPS eligibility on in-state benefit delivery, such as local emissions offsets. These amendments would open Michigan’s borders to a blossoming renewable energy market while maintaining the state’s forward progress on its economic, environmental, and energy development goals.

The views and opinions expressed in this blog are those of the authors only and do not reflect the official policy or position of the Michigan Journal of Environmental and Administrative Law or the University of Michigan.

Sarah Stellberg is a third-year student at the University of Michigan Law School, where she is Editor-in-Chief of the Michigan Journal of Environmental & Administrative Law. This post is part of the Environmental Law Review Syndicate.

[9] See Philadelphia v. New Jersey, 437 U.S. 617, 624 (1978) (“[W]here simple economic protectionism is effected by state legislation, a virtual per se rule of invalidity has been erected.”); Or. Waste Sys., Inc. v. Dep’t of Envtl. Quality, 511 U.S. 93, 99 (1994) (“[I]f a restriction on commerce is discriminatory, it is virtually per se invalid.”).

[10] Oregon Waste Systems,511 U.S. 93, 100-01 (1994). The Supreme Court has only once upheld a discriminatory statute under this test. Maine v. Taylor, 477 U.S. 131, 151-52 (1986) (upholding Maine’s ban on the import of out-of-state baitfish because Maine had no other way to prevent the spread of parasites and the adulteration of its native baitfish species); see also Erwin Chemerinsky et al., California, Climate Change, and the Constitution, 25 Envtl. F. 50, 54 (July/Aug. 2008) (noting that only one law has survived strict scrutiny analysis).

[17] Id. Hydroelectric can include waves, tides, currents or water released through a dam. This does not include “a hydroelectric pumped storage facility or a hydroelectric facility that uses a dam constructed after the effective date Act 295 unless the dam is a repair or replacement of a dam in existence on the effective date of Act 295 or an upgrade of a dam in existence on the effective date of Act 295 that increases its energy efficiency.” Id. § 460.1011.

Governors’ statements have been used to strike down several laws under the dormant Commerce Clause. For example, in Kassel v. Consolidated Freightways Corp.,450 U.S. 662, 671 (1981), the Supreme Court considered the Iowa Governor’s articulation of an impermissible purpose—deflecting burdensome interstate traffic on Iowa’s highways—in striking down an Iowa truck ban purportedly passed for highway safety reasons. Similarly in Waste Management Holdings v. Gilmore, 252 F.3d 316, 336 (4th Cir. 2001), the Fourth Circuit struck down a Virginia cap on landfill waste based on the legislative history and the governor’s statements eliciting an discriminatory intent—to prevent Virginia from “becoming New York’s dumping grounds.”

[22] John Farrell, In-State Renewable Energy Development and the Commerce Clause, Inst. for Local Self-Reliance (Feb. 2, 2011), http://www.ilsr.org/state-renewable-energydevelopment-and-commerce-clause.

[23] See, e.g., Alliance for Clean Coal v. Miller, 44 F.3d 591, 596-97 (7th Cir. 1995) (invalidating the facially neutral Illinois Coal Act, under which coal plants in Illinois were required to install scrubbers so they would be able to continue using Illinois coal as a Clean Air Act compliance option; Illinois legislature could not do an end-run around Commerce Clause restrictions by merely “encouraging” consumption of Illinois coal); Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984) (Hawaiian excise tax on liquor sales that exempted local varieties was found purposefully discriminatory, where Hawaii’s stated purpose for the exemption was to “foster the local industries by encouraging increased consumption of their product”

[24] Mich. Comp. Laws Ann. § 460.1029(1) (Westlaw).

[25] Amerada Hess Corp. v. Director, 490 U.S. 66 (1989). In Dean Milk Co. v. Madison, 340 U.S. 349, 350 (1951), for example, the court found that a Madison city ordinance requiring all milk sold in the city to be pasteurized and bottled within a five-mile radius of the city center was facially discriminatory. Similarly, in Hunt v. Washington State Apple Advertising Commission, 432 U.S. 333, 353 (1977), the court struck down a North Carolina statute that banned the sale of apples from any states with a grading system other than USDA, even though the law precluded sales from only some states. Finally, in Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. 564, 576 (1997), the court held that a Maine property tax exemption for charitable institutions that serve mostly state residents was facially discriminatory, even though several out-of-state entities benefitted from the statute.

[27] There appears to be some disagreement in the circuits as to whether discriminatory effects alone can trigger heightened scrutiny. However, Brown-Forman makes clear that heightened scrutiny applies not only when legislation is facially discriminatory, but also when a state statute or regulation’s “effect is to favor in-state economic interests over out-of-state interests . . . .” 476 U.S. 573, 579 (1986).

[28] As the Supreme Court has recognized, “there is no clear line separating close cases on which scrutiny [or tier of analysis] should apply.” Wyoming v. Oklahoma, 502 U.S. at 455 n. 12; see also Brown–Forman Distillers, Corp. v. N.Y. State Liquor Auth., 476 U.S. 573 (1986) (“We have . . . recognized that there is no clear line separating the category of state regulation that is virtually per se invalid under the Commerce Clause, and the category subject to the Pike v. Bruce Church balancing approach.”).

[43] U.S. Energy Info. Admin., How much electricity is lost in transmission and distribution in the United States?, Frequently Asked Questions, http://www.eia.gov/tools/faqs/faq.cfm?id=105&t=3 (last updated July 10, 2015).

[47] Such direct subsidization does not ordinarily run afoul of the dormant Commerce Clause prohibition on discriminatory treatment of interstate commerce. See New Energy Co. of Indiana v. Limbach, 486 U.S. 269 (1988) (“The Commerce Clause does not prohibit all state action designed to give its residents an advantage in the marketplace, but only action of that description in connection with the State’s regulation of interstate commerce. Direct subsidization of domestic industry does not ordinarily run afoul of that prohibition; discriminatory taxation of out-of-state manufacturers does.”).

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The views and opinions expressed in this blog are those of the authors only and do not reflect the official policy or position of the Michigan Journal of Environmental and Administrative Law or the University of Michigan.

The Michigan Journal of Environmental & Administrative Law (MJEAL) is The University of Michigan Law School's newest legal journal. MJEAL is made possible by a generous grant from the Graham Sustainability Institute at the University of Michigan.

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